SBV halts the upward momentum of the exchange rate

28-Mar-2020 Intellasia | Dien dan Doanh nghiep | 6:02 AM Print This Post

The upward momentum of the exchange rate had been suspended after the regulatory signal from the State Bank of Vietnam (SBV). However, many experts believed that this move could cause losses to foreign currency reserves and make the exchange rate pressure pent up.

The domestic exchange rate had continuously increased sharply in the last two weeks, both operating rates and real exchange rates. At the beginning of the trading session on March 24, SBV increased the central exchange rate by 1 dong to 23,260 dong per US dollar. Compared to the previous two weeks (March 10), the central exchange rate had risen by 70 dong, equivalent to an increase of 0.3%. Compared to the end of 2019, the central exchange rate had increased by 105 dong, equal to the rise of more than 0.45%.

The actual exchange rate at banks also increased continuously according to the central rate. Notably, in the morning session on March 24, banks simultaneously increased the exchange rate by another 100 dong, bringing the buying price to the greenback to around 23,550 VND/USD to 23,560 VND/USD and the selling price to approximately 23,730 VND/USD to 23,750 VND/USD. Compared to March 10, the US dollar buying price of banks increased by 450 dong, equivalent to an increase of 1.95%, while selling price increased by 500 dong, equivalent to a rise of 2.1%. That was also the increase in the real exchange rate compared to the end of 2019.

The exchange rate on the free market also jumped sharply in the morning of March 24, trading at 23,850 VND/USD (buying) and 23,950 VND/USD (selling), increasing 250 dong compared to the previous day and higher than buying, selling prices of banks 300 dong and 200 dong respectively.

However, the upward momentum of the domestic exchange rate was halted after SBV reduced the selling price of foreign currencies by 258 dong at the beginning of the afternoon of 24/3 to 23,650 VND/USD, even lower than the selling price of the banks at that time.

According to experts, it was a robust operating signal from SBV, showing that the agency was determined to maintain stable exchange rates and the foreign exchange market. An expert commented that this move was an affirmation that the executive was willing to sell foreign currencies to intervene to stabilise the foreign exchange market.

Not stopping there, SBV continued to signal its determination by sharply reducing the central exchange rate by 10 dong to 23,250 dong per US dollar at the beginning of the trading session on March 25. The selling price of greenback at SBV also decreased by 10 dong to 23,650 dong per US dollar, while the buying price remained at 23,175 dong per US dollar. The exchange rate at banks also immediately dropped sharply, about 100 dong to around 23,460 dong per US dollar (buy-in) and 23,660 dong per US dollar (sell out), and remained stable at this level in the session on 25/3.

However, the gap between the selling price and the buying price in foreign currencies was maintained between 190 dong to 200 dong per US dollar, showing that banks’ psychology and risks had not been removed.

Worry about accumulated pressure

According to experts, the rise of the domestic exchange rate was mainly due to the pressure from the US dollar on the world market. The dollar index, a measure of the strength of the greenback against six other major currencies, had continued to rise sharply from the one-year low of 94.89 points set on March 9 to 103 points on March 20, the highest in the last three years. Although it had decreased slightly in recent months, the dollar index was still standing at a very high level, around 101.5 points, up 5.25 percent compared to the beginning of the year. Even many forecasts showed that the greenback could rise to 105 points in the short term.

Although there was no denying that an effort to stabilise the exchange rate was necessary to maintain macro stability, many experts were concerned that the ‘quick break’ of the increase in the exchange rate might cause pressure to be compressed. An expert said, in the context that the US dollar in the market was still standing at a very high level and was expected to increase sharply, maintaining a stable exchange rate that might put pressure on. That made the price paid to maintain exchange rate stability also growing.

The price there, according to the above expert, was to accept the loss of foreign exchange reserves when having to sell foreign currencies to intervene in the exchange rate. That was demonstrated in exchange rate tensions in mid-2018 when SBV had to sell a large amount of foreign currency to intervene in the market to maintain a stable exchange rate.

And yet, the stable exchange rate while the US dollar strengthened also invisibly pushed dong to rise against many other currencies, including currencies of many major trading partners of Vietnam, thereby harming export activities. However, the biggest worry of experts was that the exchange rate was compressed too strongly until it could no longer hold, then it could inflate more strongly.

Therefore, the advice of the above expert was that it was necessary to flexibly manage the exchange rate to strictly follow the movements of the foreign exchange market and the fluctuations of the US dollar on the world market. It was not until the exchange rate fluctuated too much, affecting the psychology, or the supply-demand had abnormal fluctuations, that the market needed intervention.

The most important thing was to stabilise the foreign exchange market, this was different from the exchange rate stability, said the expert. It was also reasonable for the exchange rate to follow US dollar movements carefully. As long as the supply and demand of foreign currencies were not mutated, the liquidity of foreign currencies of banks was still guaranteed, meaning that the foreign currency market was still stable and smooth.

 


Category: Finance, Vietnam

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